Determinants of Priority Interest Rates for Securities Based on Non-Performing Loans in Chinese Commercial Banks

Yanjin Chen Yanjin Chen
This thesis described a linear equation between the priority interest rate and these four determinants. The article also comes up with one question that there are still some other determinants of affecting the priority interest rate. What’s more, these determinants are also important role in affecting the priority interest rate.

Determinants of Priority Interest Rates for Securities Based on Non-Performing Loans in Chinese Commercial Banks

Since mortgage-backed securities were first issued in the US toward the latter part of the 1970s, credit asset securitization has developed rapidly in many countries around the world and become one of the most important financial tools at the end of Twentieth Century. From international environment since the 1980s, western countries, which represented by the US and the UK, and eastern countries, which represented by South Korean and Japan, deregulated in the financial market. asset-backed securitization (ABS) refers to the securities that are introduced based on an asset pool which a group of non-performing loans (NPLs), which lack of liquidity, but own expected cash flows that generated by NPLs. The securities are transformed to be for-sale and run in the financial market through structural restructuring. And then financial innovation has become an inevitable trend. The rapid growth in credit asset securitization may be attributable to the fact, which is able to increase business management measures and diversify credit risk. ABS also plays an active role in multiple functions such as connecting the credit and capital markets, advancing healthy growth in the capital markets, and other aspects.

Chinese four largest state-owned commercial banks have more and more serious problem in NPLs. Therefore, disposing of NPLs is an urgent issue in China. But Chinese economic development is so rapid it remained many threats in the NPLs due to a policy problem, economic structure, and Chinese special status. What's more, the history of securitization in China is short. There is no enough experience and technology to price the securities based on NPLs reasonably. Therefore, China started the credit asset securitization pilot in 2005 but subsequently halted due to the subprime crisis. And since 2012, the regulators restart securitization of credit assets, China's securities market grew rapidly, by the end of November 2015, the total amount of all types of credit asset securitization products issued was more than 50 billion RMB according to WIND database. With the rapid development of Chinese credit asset securitization market, investors are also deepening the awareness of the risks and benefits of securitization products. But on the contrary, China's pricing methods for the securitization products are still primary, and there is a gap between the risk assessment system of developed countries and China. This research is based on the background of the rapid development of the securitization of credit assets. It analyzes the determinants of affecting the priority interest rate of the securities of NPLs. What's more, all the securities have been issued in the Chinese financial market.

This thesis mainly introduced the background, the significance, the definition of ABS and its operating process and so on. The core part is about the determinants of affecting the priority interest rate of the senior tranche for NPLs through multivariate linear regression model.  And then the thesis would derive the linear relationship between the priority interest rate and the determinants. For the entire financial market, it will improve the role of financial products of ABS in optimizing the allocation of capital resources of the whole society, which has certain application value. In addition, based on the empirical results, the corresponding policy recommendations for the development of ABS in China are proposed to facilitate the healthy development of ABS. 

After regression analysis, the thesis concludes that the determinants of affecting the priority interest rate for senior tranche based on NPLs are: whether it is the first issuance, whether it is state-owned enterprise, the ratio of the issued amount to the pooled amount and the ratio of the number of loans to the number of borrowers. There are negative correlations between the priority interest rate and each determinant except for the ratio of the issued amount to the pooled amount. In other words, the issuance of the securities for NPLs is more than one time, its corresponding priority interest rate is lower; the securities with state-owned enterprise have more guarantee and higher credibility because the government-owned enterprise has enough funds to support its operations and the probability of bankruptcies is lower. The risks are relatively lower. The securities are more secure, and the priority interest rate is lower; the smaller the number of borrowers and the more loans, the more the number of loans per capita, which means that the greater the span, the smaller the concentration and the higher the degree of dispersion. So, the risk is small, and then the interest is low, that is, the priority interest rate is low. There is a positive correlation between the priority interest rate and the ratio of the issued amount to the pooled amount. The lower the issued amount or the higher the amount of the asset pool, the higher the probability to get a benefit for the investors who own the securities, that is, a higher probability of redemption. In other words, the higher the ratio of the issued amount to the pooled amount, the higher the risk of investment. And then the investors will receive more interest, so the priority interest rate will be higher.

As for constant, its value is large and much larger than the coefficients of other determinants. Here the article comes up with one question that there are still some other determinants of affecting the priority interest rate. What’s more, these determinants are also important role in affecting the priority interest rate. However, Due to the lack of data, this study cannot completely analyze the regression analysis of each factor. Therefore, at this point, this thesis suggests further research should consider or focus on other determinants. Other determinants can be guarantee method of loans, location of enterprise, industries of enterprise and the purpose of the loan, etc. These are just referencing. The thesis hopes later scholar and researcher do more work on those.

There are still some regrets on this research. This research cannot do too much work on other determinants due to lack of data. This thesis would like to research other determinants: guarantee method, location of enterprise, industries of enterprise and the purpose of the loan and so on. But this thesis has to give up for these determinants as a result of a lack of data. Another regret is that this thesis also wants to research the specific pricing process of ABS for NPLs through capital asset pricing model (CAPM). And then the thesis proposes a specific and feasible method to price ABS for NPLs. But lack of data also breaks my thoughts. So here the thesis just provides some suggestions to research ABS for NPLs. If China wants to obtain breakthrough progress in disposing of NPLs, it still needs to do a large number of works on it. China still has a long path to go in ABS for NPLs in order to dispose of NPLs efficiently.

Bibliografie

In this thesis, asset-backed securitization (ABS) refers to the securities that are introduced based on an asset pool which a group of non-performing loans (NPLs), which lack of liquidity, but own expected cash flows that generated by NPLs. The securities are transformed to be for-sale and run in the financial market through structural restructuring. As we all know, the pricing of ABS for NPLs is complicated and difficult. And Chinese four largest state-owned commercial banks have more and more serious problems in NPLs. Therefore, disposing of NPLs is an urgent issue in China. But Chinese economic development is so rapid it remained many threats in the NPLs due to a policy problem, economic structure, and Chinese special status. What's more, the history of securitization in China is short. There is no enough experience and technology to price the securities based on NPLs reasonably. In order to research the pricing problem for ABS of NPLs, this thesis would like to explore the determinants of affecting priority interest rate for senior tranche because of realizing these problems.  It aims to provide the direction and method of pricing in the further securitization process. In this thesis, the multivariate regression analysis model is to qualitatively analyze the relevant factors affecting the priority interest rate of the securities which is based on NPLs. The thesis concludes that the determinants of affecting the priority interest rate for senior tranche based on NPLs are: whether it is the first issuance, whether it is state-owned enterprise, the ratio of the issued amount to the pooled amount and the ratio of the number of loans to the number of borrowers. There are negative correlations between the priority interest rate and each determinant except for the ratio of the issued amount to the pooled amount. In addition, this thesis described a linear equation between the priority interest rate and these four determinants. The article also comes up with one question that there are still some other determinants of affecting the priority interest rate. What’s more, these determinants are also important role in affecting the priority interest rate.

Universiteit of Hogeschool
Applied Economics Science: Business Economics
Publicatiejaar
2019
Promotor(en)
Prof. Dr. Hairui Zhang
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